Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jan. 31, 2015

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). These footnotes condense or omit information and disclosures which substantially duplicate information provided in the Company’s latest audited financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2014. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The operating results for the three and six months ended January 31, 2015 are not necessarily indicative of future trends or the Company’s results of operations for the entire fiscal year ending July 31, 2015.

Certain prior period amounts on the balance sheet have been reclassified to conform to the current period presentation. Net income and shareholders’ equity were not affected by these reclassifications. The Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) and Statements of Cash Flows for the three and six months ended January 31, 2014 also reflect retroactive adjustments made by the Company to the bargain purchase gain reported as part of the Company’s acquisition of the ECT and Multitest businesses, which was reported in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2014.

The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue based on guidance provided in Topic 605, Revenue Recognition, to the Financial Accounting Standards Board Codification (“FASB ASC”) and Accounting Standards Update 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectability is reasonably assured.

Revenue related to equipment sales is recognized when: (a) the Company has a written sales agreement; (b) delivery has occurred or service has been rendered; (c) the price is fixed or determinable; (d) collectability is reasonably assured; (e) the equipment delivered is a standard product with historically demonstrated acceptance; and (f) there is no unique customer acceptance provision or payment tied to acceptance or an undelivered element significant to the functionality of the system. Generally, payment terms are time based after product shipment. From time to time, sales to a customer may involve multiple elements, in which case revenue is recognized on the delivered element provided that (1) the undelivered element is a proven technology, (2) there is a history of acceptance on the equipment with the customer, (3) the undelivered element is not essential to the customer’s application, (4) the delivered item(s) has value to the customer on a stand-alone basis, and (5) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. The arrangement consideration, or the amount of revenue to be recognized on each separate unit of accounting, is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Net service sales as presented in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) includes revenue associated with LTX-Credence maintenance or service contracts only, and excludes ECT and Multitest. ECT and Multitest generally do not provide maintenance and service contracts, but rather sell spare parts and other components, and as a result these sales are recognized as net product sales in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss). Revenue related to spare parts and components is recognized when the four main criteria listed above are met. Generally customer acceptance is not required for spare parts and component sales.

Inventories

Inventories

Inventories are stated at the lower of cost or market, determined on the first-in, first-out (“FIFO”) method, and include materials, labor and manufacturing overhead. The components of inventories are as follows:

	January 31,  2015		July 31,  2014
	(in thousands)
Material and purchased components	$	25,509	$	22,394
Work-in-process		20,514		23,806
Finished equipment, including inventory consigned to customers		15,808		23,470
Total inventories	$	61,831	$	69,670

The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors, including forecasted sales or usage, estimated product end of life dates, estimated current and future market value, and new product introductions.

Purchasing and usage alternatives are also explored to mitigate inventory exposure. When recorded, reserves are intended to reduce the carrying value of inventory to its net realizable value. As of January 31, 2015 and July 31, 2014, inventory was stated net of inventory reserves of $48.1 million and $45.3 million, respectively. If actual demand for products deteriorates or market conditions are less favorable than projected, additional inventory reserves may be required. Such reserves are not reversed until the related inventory is sold or otherwise disposed of.

Goodwill and Other Intangibles

Goodwill and Other Intangibles

In accordance with FASB ASC Topic 350—Intangibles—Goodwill and Other (“ASC 350”), goodwill is not amortized. Rather, the Company’s goodwill is subject to periodic impairment testing. ASC 350 requires that the Company assign its goodwill to reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The testing of goodwill for impairment is performed at a level referred to as a reporting unit. As of January 31, 2015, the Company currently has one reporting unit to which the full balance of goodwill is allocated, its semiconductor test reporting unit. All of the goodwill recorded on the Company’s Consolidated Balance Sheet is related to its LTX-Credence business, since the Company did not change the underlying reporting structure of the Semiconductor Test reporting unit. Based on ASC 350-20-35-3A, as of January 31, 2015, there were no triggering events that required the Company to complete impairment testing.

The Company’s goodwill consists of the following:

Goodwill	January 31, 2015		July 31, 2014
	(in thousands)
Merger with Credence Systems Corporation (August 29, 2008)	$	28,662	$	28,662
Acquisition of Step Tech Inc. (June 10, 2003)		14,368		14,368
Total goodwill	$	43,030	$	43,030

Amortizable intangible assets which relate to the acquisition of the Acquired Businesses and the merger with Credence Systems Corporation (“Credence”), consist of the following, and are included in intangibles asset, net on the Company’s Consolidated Balance Sheets:

			As of January 31, 2015
Description	Estimated   Useful Life		Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in years)		(in thousands)		(in thousands)		(in thousands)
Developed technology		6.0-10.0	$	29,400	$	(26,439)	$	2,961
Customer Relationships – ECT, Multitest, atg-Luther & Maelzer		2.0		1,300		(839)		461
Maintenance agreements—ASL & Diamond		7.0		1,900		(1,493)		407
Total intangible assets			$	32,600	$	(28,771)	$	3,829
			As of July 31, 2014
Description	Estimated Useful Life		Gross Carrying Amount		Accumulated Amortization		Net Amount
	(in years)		(in thousands)		(in thousands)		(in thousands)
Developed technology		6.0-10.0		29,400	$	(25,880)	$	3,520
Customer Relationships – ECT, Multitest, atg-Luther & Maelzer		2.0		1,300		(498)		802
Maintenance agreements—ASL & Diamond		7.0		1,900		(1,357)		543
Total intangible assets			$	32,600	$	(27,735)	$	4,865

Intangible assets, other than trademarks owned by the Company, are amortized based upon the pattern of estimated economic use over their estimated useful lives. The weighted average estimated remaining useful life over which these intangible assets will be amortized is 3.8 years.

The Company expects amortization for these intangible assets to be:

Year ending July 31,	Amount (in thousands)
2015	$	856
2016		1,171
2017		617
2018		414
Thereafter		771
Total	$	3,829

The identifiable intangible assets associated with the Dover Acquisition include $6.7 million of trademarks. The Company believes these trademarks will contribute to the Company’s cash flows indefinitely. Therefore, in accordance with ASC 350, the Company has assigned an indefinite useful life to the trademarks, and will not amortize the trademarks until their useful lives are no longer indefinite.

Long Lived Assets

Long Lived Assets

On an on-going basis, management reviews the value of and period of amortization or depreciation of the Company’s long-lived assets. In accordance with Topic 360, Property, Plant and Equipment, to the FASB ASC, the Company reviews whether impairment losses exist on its long-lived assets other than goodwill when indicators of impairment are present. During this review, the Company assesses future cash flows and re-evaluates the significant assumptions used in determining the original cost of long-lived assets other than goodwill. Although the assumptions may vary, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been a permanent impairment of the value of long-lived assets based upon events or circumstances that have occurred since acquisition. The impairment amount recognized is based upon a determination of the impaired asset’s fair value compared to its carrying value. As of January 31, 2015, there were no indicators that required the Company to conduct a recoverability test.

Foreign Currency Remeasurement

Foreign Currency Remeasurement

The financial statements of the Company’s foreign subsidiaries are remeasured in accordance with Topic 830, Foreign Currency Matters, to the FASB ASC. The functional currency of the Company’s tester group is the U.S. dollar. Accordingly, the Company’s foreign subsidiaries that are included in this group remeasure monetary assets and liabilities at month-end exchange rates while long-term non-monetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the month. Net gains resulting from foreign currency remeasurement and transaction gains are included in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) as a component of other income, net, and were $1.4 million and $1.8 million, respectively for the three and six months ended January 31, 2015 and $0.1 million and $0.1 million, respectively for the three and six months ended January 31, 2014. The functional currency of each of the Acquired Businesses is the local currency, predominantly Euro, Malaysian Ringgit and Singapore Dollars, and net gains or losses resulting from foreign currency remeasurement and translation gains or losses are recorded in stockholders’ equity as accumulated other comprehensive income (loss).

Product Warranty Costs

Product Warranty Costs

Certain of the Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of products over a specified period of time at no cost to its customers. The Company generally offers a warranty for most of its products, the standard terms and conditions of which are based on the product sold and the customer. For all products sold, subject to a warranty, the Company accrues a liability for the estimated cost of standard warranty at the time of shipment. Factors that impact the warranty liability include the number of installed products, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts as amounts as necessary.

The following table shows the change in the Company’s product warranty liability, as required by Topic 460, Guarantees, to the FASB ASC for the six months ended January 31, 2015 and 2014:

	Six Months Ended  January 31,
Product Warranty Activity	2015		2014
	(in thousands)
Balance at beginning of period	$	3,240	$	1,217
Warranty reserve acquired from ECT and Multitest		—		1,970
Warranty expenditures for current period		(2,750)		(1,966)
Changes in liability related to pre-existing warranties		(280)		(98)
Provision for warranty costs in the period		2,843		1,782
Balance at end of period	$	3,053	$	2,905

Engineering and Product Development Expenses

Engineering and Product Development Expenses

The Company expenses all engineering and product development expenses as incurred. Expenses relating to certain software development costs, which were subject to capitalization in accordance with Topic 485, Software, to the FASB ASC, were insignificant.

Shipping and Handling Costs

Shipping and Handling Costs

Shipping and handling costs are included in cost of sales in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). Shipping and handling costs were insignificant for the three and six months ended January 31, 2015 and 2014.

Income Taxes

Income Taxes

Provision for income taxes relates principally to operating results of profitable foreign entities in jurisdictions primarily in Asia and Europe partially offset by a tax benefit recorded as a result of the Dover Acquisition, and the release of reserves due to statute of limitation expirations.

As of January 31, 2015 and July 31, 2014, the Company’s total liability for unrecognized income tax benefits was $5.9 million and $6.6 million, respectively (of which $2.4 million and $3.0 million, respectively, if recognized, would impact the Company’s income tax rate). The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for income taxes. As of January 31, 2015 and July 31, 2014, the Company had accrued approximately $0.9 million and $1.0 million, respectively, for potential payment of accrued interest and penalties.

The Company conducts business globally and, as a result, the Company and its subsidiaries or branches file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Singapore, Malaysia, China, France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for the years prior to 1998.

As a result of the Company’s merger with Credence on August 29, 2008, a greater than 50% cumulative ownership change in both entities triggered a significant limitation on net operating loss carryforward utilization. The Company’s ability to use acquired U.S. net operating loss and credit carryforwards is subject to annual limitation as defined in sections 382 and 383 of the Internal Revenue Code. The Company currently estimates that the annual limitation on its use of net operating losses generated through August 29, 2008 will be approximately $10.1 million which, based on currently enacted federal carryforward periods, limits the amount of net operating losses that are available for utilization to approximately $202.0 million. The Company has recorded a valuation allowance against the full value of U.S. net operating loss and credit carryforwards, and will continue to assess the realizability of these carryforwards in subsequent periods.

Accounting for Stock-Based Compensation

Accounting for Stock-Based Compensation

The Company has equity awards outstanding under various stock-based compensation plans, including the 2010 Stock Plan (“2010 Plan”), 2004 Stock Plan, 2001 Stock Plan, 1999 Stock Plan, and 1993 Stock Plan. In addition, the Company assumed and has made awards that remain outstanding under the StepTech, Inc. Stock Option Plan as part of its acquisition of StepTech, Inc. (“StepTech”) in 2003 and the Credence 2005 Stock Incentive Plan in connection with its acquisition of Credence. The Company can only grant awards from the 2010 Plan.

During the three months ended January 31, 2015, the Company granted 61,400 Restricted Stock Units (“RSUs”), 60,000 of which are service-based and vest in full on the twelve month anniversary of the grant date, and 1,400 of which are service-based and vest 25% per year for four years. The stock-based compensation expense related to these awards is recognized over their vesting periods.

The Company recognizes stock-based compensation expense on its equity awards in accordance with the provisions of Topic 718, Compensation—Stock Compensation to the FASB ASC (“Topic 718”). Under Topic 718, the Company is required to recognize as expense the estimated fair value as of the grant date of all share-based awards to employees. In accordance with this standard, the Company recognizes the compensation cost of each service-based award on a straight-line basis over the vesting period of such award. For the three and six months ended January 31, 2015, the Company recorded stock-based compensation expense of approximately $1.9 million and $3.8 million respectively, in connection with its share-based awards. For the three and six months ended January 31, 2014, the Company recorded stock-based compensation expense of approximately $1.3 million and $2.4 million respectively, in connection with its share-based awards.

Net income (loss) per Share

Net income (loss) per share

Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and RSUs, and is computed by dividing net income (loss) by the weighted average number of common shares and the dilutive effect of all securities outstanding.

Reconciliation between basic and diluted net income (loss) per common share is as follows:

	Three Months Ended  January 31,						Six Months Ended  January 31,
	2015			2014			2015			2014
	(in thousands, except per share data)
Net income (loss)		$	3,929		$	(1,604)		$	15,991		$	(8,504	)
Basic EPS:
Weighted average shares outstanding- basic			54,362			48,220			52,745			48,060
Basic income (loss) per share		$	0.07		$	(0.03)		$	0.30		$	(0.18	)
Diluted EPS:
Weighted average shares outstanding- basic			54,362			48,220			52,745			48,060
Plus: impact of stock options and unvested RSUs			305			—			765			—
Weighted average shares outstanding- diluted			54,667			48,220			53,510			48,060
Diluted income (loss) per share		$	0.07		$	(0.03)		$	0.30		$	(0.18	)

For the six months ended January 31, 2015 and 2014, options to purchase approximately 0.1 million shares and 0.6 million shares, respectively, of common stock were not included in the calculation of diluted net loss per share because the effect of including the options would have been anti-dilutive. These options could be dilutive in the future. The calculation of diluted net loss per share also excludes 2.0 million RSUs for the three and six months ended January 31, 2014 in accordance with the contingently issuable shares guidance of Topic 260, Earnings Per Share, to the FASB ASC.

Cash and Cash Equivalents and Marketable Securities

Cash and Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments that are readily convertible to cash and that have original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of operating cash and money market accounts. Marketable securities consist primarily of debt securities that are classified as available-for-sale and held-to-maturity, in accordance with Topic 320, Investments—Debt and Equity Securities, to the FASB ASC. The Company also holds certain investments in commercial paper or certificates of deposit that it considers to be held-to-maturity, based on their respective maturity dates. Securities available-for-sale include corporate, asset-backed, mortgage-backed, and governmental obligations with various contractual maturity dates, some of which are greater than one year. The Company considers the securities to be liquid and convertible to cash within 30 days. The Company has the ability and intent to liquidate any security that the Company holds to fund operations over the next twelve months, if necessary, and as such has classified all of its marketable securities as short-term. Governmental obligations include U.S. Government, State, Municipal and Federal Agency securities. The Company has an overnight sweep investment arrangement with its bank for certain accounts to allow the Company to enter into diversified overnight investments via a money market mutual fund which generally provides a higher investment yield than a regular operating account.

The market value and maturities of the Company’s marketable securities are as follows:

	Total Amount
	(in thousands)
January 31, 2015
Due in less than one year	$	26,548
Due in 1 to 3 years		30,342
Total marketable securities	$	56,890
	Total Amount
	(in thousands)
July 31, 2014
Due in less than one year	$	21,778
Due in 1 to 3 years		17,881
Total marketable securities	$	39,659

The market value and amortized cost of marketable securities are as follows:

	Market Value		Amortized Cost
	(in thousands)
January 31, 2015
Corporate	$	10,787	$	10,744
Government		27,905		27,625
Mortgage-Backed		2,454		2,467
Asset-Backed		15,744		15,717
Total	$	56,890	$	56,553
	Market Value		Amortized Cost
	(in thousands)
July 31, 2014
Corporate	$	21,070	$	20,884
Government		5,045		5,038
Mortgage-Backed		1,920		1,923
Asset-Backed		11,624		11,609
Total	$	39,659	$	39,454

Unrealized gains and losses on investments held by the Company are reflected as a separate component of comprehensive income (loss) within Stockholders’ Equity. Realized gains, losses and interest on investments held by the Company are included in interest income in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company analyzes its investments for impairment on a quarterly basis or upon occurrence of indicators of possible impairment. There was no other than temporary impairment losses recorded in the three and six months ended January 31, 2015 or 2014.

The following table summarizes marketable securities and related unrealized gains and losses as of January 31, 2015 and July 31, 2014:

January 31, 2015	Market Value		Unrealized Gain/(Loss)
	(in thousands)
Securities < 12 months unrealized losses	$	9,578		$                (27)
Securities > 12 months unrealized losses		10,365		(24)
Securities < 12 months unrealized gains		16,970		10
Securities > 12 months unrealized gains		19,977		43
Total	$	56,890		$                    2
July 31, 2014	Market Value		Unrealized Gain/(Loss)
	(in thousands)
Securities < 12 months unrealized losses	$	5,101	$	(19)
Securities > 12 months unrealized losses		9,739		(24)
Securities < 12 months unrealized gains		16,677		20
Securities > 12 months unrealized gains		8,142		23
Total	$	39,659	$	—

Property and Equipment

Property and Equipment

The Company records acquired property and equipment at cost. The Company provides for depreciation using the straight-line method. Charges are made to operating expenses in amounts that are sufficient to amortize the cost of the assets over their estimated useful lives. Equipment spares used for service and internally manufactured test systems used for testing components and engineering projects are recorded at cost and depreciated over three to seven years. Repair and maintenance costs that do not extend the lives of property and equipment are expensed as incurred. The Company’s property and equipment as of January 31, 2015 and July 31, 2014 are summarized as follows:

	January 31,         2015		July 31,         2014		Estimated         Useful Lives
	(in thousands)				(in years)
Equipment spares	$	38,195	$	45,572	5 or 7
Machinery, equipment and internally manufactured systems		42,112		43,388	3-7
Land		8,641		8,152	-
Building		10,668		11,157	10-40
Office furniture and equipment		2,765		3,209	3-8
Purchased software		457		455	3
Leasehold improvements		10,339		7,414	Lesser of lease term or useful life, not to exceed 10 years
Property and equipment, gross		113,177		119,347
Less: accumulated depreciation and amortization		(72,555)		(78,464)
Property and equipment, net	$	40,622	$	40,883